BANK ONE CEO ON HOT SEAT

As Bank One Corp. CEO John B. McCoy girds to release third-quarter earnings this week and a crucial strategic plan later this month, his bank is in turmoil and he is under fire.

One year after Bank One Corp.'s merger with the former First Chicago NBD Corp., Mr. McCoy's bank risks alienating important constituencies even as he bids to transform the Midwest's largest lender into a national retail franchise and Internet-based banking force.

Bank One shareholders -- among them influential board members -- are suffering steep losses as the company's stock price slides because of anticipated lower quarterly earnings; consumers are unhappy with the aggressive credit card practices of the First USA Inc. unit and the bank's hefty transaction fees, and regulators are looking into customer complaints concerning First USA's business practices.

The 56-year-old Mr. McCoy, who declined to be interviewed for this article, is charged with fixing these problems while also coping with top-level turnover within the executive suite, where the bank's two vice-chairmen have abruptly retired within the past three months. And there's industry speculation that the bank's 21-member board may look to Chairman Verne G. Istock, former head of First Chicago NBD Corp., to play a greater role in shoring up operations and earnings.

"Am I confident in management? No," says Nancy Bush, an analyst with Livingston, N.J.-based Ryan Beck & Co. "Otherwise I, as a value investor, would be climbing all over this thing."

Indeed, the Chicago-based bank is not winning popularity contests on Wall Street, where three analysts have put "sell" recommendations on its stock -- a rarity in today's bull market.

Bank One's share price has plummeted 40% since Aug. 24, when management warned that missteps at the First USA credit card division would lower estimated earnings for the second half of 1999 by about $500 million -- dropping growth 7% to 8% below initial projections (Crain's, Aug. 30).

The stock price collapse has trimmed billions from the bank's market capitalization while costing company officers and directors a personal fortune -- on paper, at least.

"This bank has a very serious struggle ahead of it," says Alan Wilson, president of Talon Asset Management Inc., a Chicago-based money manager.

Six officers and directors with the largest personal Bank One holdings, as listed in the March 30 proxy, have seen the value of their stock and options shrink a staggering $288.3 million since the First USA fiasco.

Strategy hamstrung

Hardest hit: Chicago's Crown family, which holds 9 million Bank One shares and has lost, on paper, more than $178.6 million. James S. Crown, a general partner in Henry Crown & Co. and a Bank One director, couldn't be reached for comment.

Mr. McCoy and Richard W. Vague, executive vice-president and head of First USA, hold the most options among Bank One insiders and have suffered the largest losses, proportional to total holdings, because the bank's current stock price is less than the exercise price on many of their options.

The value of Mr. McCoy's holdings has plunged 51% to $28.3 million, while the value of Mr. Vague's has fallen 47% to $26.2 million.

Foremost, management likely will be forced to boost the bank's performance through internal growth, not mergers or acquisitions. That's because Bank One's market capitalization has shrunk by nearly $25 billion since August, making the bank an unlikely acquirer. And even selling the bank for a 30% premium, a rumored prospect, wouldn't bring its stock price close to the 52-week high of $63.56, set May 13.

"I don't think anybody would want to inherit this company right now," says Talon's Mr. Wilson. "Why not wait and get it cheaper a year from now?"

The lower stock price may also compel Bank One's board to entertain some high-level changes.

Board members, slated to meet Tuesday, may look to Chairman Mr. Istock to play a greater role in operations -- and ensure that there are no additional earnings bombshells. Neither Mr. Istock nor board members were available for comment.

Mr. Istock's conservatism -- his most-criticized attribute as head of First Chicago NBD -- is now touted by bank insiders, who are quick to note that the bank never suffered embarrassments like those of recent months while he was CEO. Some speculate that the board will ask Mr. Istock to play fiscal cop, keeping a closer watch on earnings-sensitive operations.

And Mr. McCoy is almost certain to be more involved in commercial banking following the resignation last week -- "for personal reasons" -- of Vice-chairman Richard Lehmann, 55, who headed commercial banking. In late July, David Vitale, 53, announced his retirement from the same post, to follow other pursuits. A successor to Mr. Lehmann is expected to be announced this week.

Before the July shuffle, Mr. Lehmann, who was a longtime McCoy lieutenant, had overseen the bank's consumer businesses, including the controversial First USA credit card division. Mr. McCoy assumed those responsibilities when Mr. Lehmann was named to replace Mr. Vitale.

But Mr. Lehmann's departure will do little to ease Wall Street's concerns about management's direction, even though the problems in the credit card and retail division occurred on his watch.

Afoul of customers, regulators

First USA, the nation's second-largest credit card company, suffered higher-than-expected customer attrition after it eliminated a one-day grace period for late payments, acted slowly to fix a vendor snafu that caused many customers to be wrongly charged late fees, was slow to match lower introductory rates offered by competitors and then underestimated the pull these offers would have on dissatisfied cardholders.

On another front, Mr. McCoy must now contend with consumer backlash over the bank's retail fees -- for overdrafts, stop-payment services and use of automated teller machines (ATMs) -- which are among the highest in the Chicago market and far exceed national averages.

For example, Bank One charges $25 for an overdraft, while the Chicago bank average is $19.77, and banks nationwide charge an average $16.65.

Bank One online message boards are loaded with customer complaints about fees, service and computer glitches related to the recent integration of the predecessor banks' systems.

A Bank One spokesman responds that Bank One customers who manage their accounts appropriately and use the bank's Chicago network of 1,000 ATMs probably won't pay any fees.

The bank's aggressive retail and credit card tactics also have landed it in hot water with state and federal regulators.

The Office of Comptroller of the Currency is investigating payment problems at First USA, while the Illinois attorney general's office reportedly is probing whether Bank One and other banks illegally disclosed confidential customer information to telemarketers. (The state declined comment.)

First USA, meanwhile, faces at least five class-action lawsuits filed by consumers charging they were improperly charged late fees.

Fixing these problems will be no easy task.

As an important step to restoring investor confidence, Mr. McCoy is expected to announce cost cuts at the $256-billion-assets bank and promising early results for WingspanBank.com, its highly touted Internet bank.

And though Bank One's image is tainted, even critics say its operations remain fundamentally sound.

"I'm loath to write it off right now," says Ms. Bush of Ryan Beck. "The magnitude of their problems has been overblown by their own mishandling of the issues."